Analysis: Lowe’s hampered by the shadow Home Depot casts over the sector
On the surface, the results from Lowe's look somewhat disappointing: total sales are down by 1.8%, while net income dropped by 16.4%. In fact, all of this decline is because there was one less week of trading compared to last year.
The comparable numbers are, therefore, the best indicator of performance. Here, group sales rose by 4.1% and revenue at the U.S. division by 3.7%. These are reasonable rates of growth. However, they do not compare favorably to Home Depot's performance over the same period which saw its overall and U.S. comparables grow by 7.5% and 7.2% respectively.
In our view, Lowe's U.S. same-store sales figure is slightly underweight. Given the favorable dynamics in the market, we would have expected a moderately better performance. However, in our view, Lowe's ability to capitalize on key trends and dynamics is hampered by the shadow Home Depot casts over the sector.
The freezing weather in the Northeast over late December and early January is a case in point. This drove up demand for all sorts of winter products like shovels, ice melt, and snowblowers. However, the majority of this custom went to Home Depot.
Lowe's winter product offer was solid, its pricing was sharp, and its customer service remains good. However, when it comes to buying products, large numbers of shoppers automatically think of Home Depot and default to buying from either its website or its stores. In a lot of cases, Lowe's doesn't even get considered.
This is not a new issue; it is one with which Lowe's has grappled for a long time. In essence, Lowe's needs to create a stronger impression with consumers, and it needs to establish some clear and sustainable points of differentiation over its larger rival. This is one of the reasons it is pursuing exclusive partnerships, such as becoming the sole third-party distributor for Sherwin-Williams paint products.
As much as we believe exclusivity is right, we are not entirely convinced that the Sherwin-Williams deal is prudent. After all, Sherwin-Williams already has a large number of its own stores which will continue to sell paint, and by focusing more heavily on one brand, Lowe's could be perceived as limiting choice for consumers. In essence, the direction of travel is sensible, but the specifics of this particular deal leave a lot to be desired.
In our view, the main opportunity for Lowe's is a focus on softer DIY categories, like indoor decorative projects. Here, Lowe's has already made progress in store, including the increased use of specialist advisors. However, we believe the company should push this area more heavily and utilize its assets such as The Mine website (formerly branded as ATGStores.com) to drive sales in the lucrative home furnishings market.
A focus on and better execution of specific occasions are also vital. Over the holiday period, Lowe's significantly underperformed Home Depot on items like holiday decor, Christmas trees, and other sundries. The offer is not terrible, but merchandising could be better, and more effort is needed around marketing. Although the holiday occasion is a case in point, the same logic applies to other events like outdoor grilling in summer, and winter home preparation in late fall.
All that said, Lowe's is in a good position and will continue to benefit from the benign economic conditions in the housing market and general economy. It's just that the lion's share of growth will continue to flow to Home Depot, rather that its smaller rival.
The comparable numbers are, therefore, the best indicator of performance. Here, group sales rose by 4.1% and revenue at the U.S. division by 3.7%. These are reasonable rates of growth. However, they do not compare favorably to Home Depot's performance over the same period which saw its overall and U.S. comparables grow by 7.5% and 7.2% respectively.
In our view, Lowe's U.S. same-store sales figure is slightly underweight. Given the favorable dynamics in the market, we would have expected a moderately better performance. However, in our view, Lowe's ability to capitalize on key trends and dynamics is hampered by the shadow Home Depot casts over the sector.
The freezing weather in the Northeast over late December and early January is a case in point. This drove up demand for all sorts of winter products like shovels, ice melt, and snowblowers. However, the majority of this custom went to Home Depot.
Lowe's winter product offer was solid, its pricing was sharp, and its customer service remains good. However, when it comes to buying products, large numbers of shoppers automatically think of Home Depot and default to buying from either its website or its stores. In a lot of cases, Lowe's doesn't even get considered.
This is not a new issue; it is one with which Lowe's has grappled for a long time. In essence, Lowe's needs to create a stronger impression with consumers, and it needs to establish some clear and sustainable points of differentiation over its larger rival. This is one of the reasons it is pursuing exclusive partnerships, such as becoming the sole third-party distributor for Sherwin-Williams paint products.
As much as we believe exclusivity is right, we are not entirely convinced that the Sherwin-Williams deal is prudent. After all, Sherwin-Williams already has a large number of its own stores which will continue to sell paint, and by focusing more heavily on one brand, Lowe's could be perceived as limiting choice for consumers. In essence, the direction of travel is sensible, but the specifics of this particular deal leave a lot to be desired.
In our view, the main opportunity for Lowe's is a focus on softer DIY categories, like indoor decorative projects. Here, Lowe's has already made progress in store, including the increased use of specialist advisors. However, we believe the company should push this area more heavily and utilize its assets such as The Mine website (formerly branded as ATGStores.com) to drive sales in the lucrative home furnishings market.
A focus on and better execution of specific occasions are also vital. Over the holiday period, Lowe's significantly underperformed Home Depot on items like holiday decor, Christmas trees, and other sundries. The offer is not terrible, but merchandising could be better, and more effort is needed around marketing. Although the holiday occasion is a case in point, the same logic applies to other events like outdoor grilling in summer, and winter home preparation in late fall.
All that said, Lowe's is in a good position and will continue to benefit from the benign economic conditions in the housing market and general economy. It's just that the lion's share of growth will continue to flow to Home Depot, rather that its smaller rival.